Shield Corporation Limited (PSX: SCL) was incorporated in Pakistan as a public limited company in 1975. The company’s principal business activity is the manufacturing, trading and sale of oral hygiene and baby care products. SCL caters to the needs of over 300 towns and cities of Pakistan. Besides, the company has its presence in Europe, Asia and Africa.
Pattern of Shareholding
As of June 30, 2022, SCL has a total of 3.9 million shares outstanding which are held by 352 shareholders. Directors, CEO, their spouse and minor children have the majority stake of 74.45 percent in the company. Local general public hold 25.31 percent shares of SCL. The remaining shares are held by other categories of shareholders each accounting for less than 1 percent shares of the company.
Performance Trail (2018-22)
Except for a marginal dip in 2020, the topline of SCL has been riding an upward trajectory in all the years under consideration. The bottomline eroded in 2019 and 2020 to post net loss in the latter year. After posting a net loss in 2020, the bottomline boasted a massive turnaround in 2021, however, the fortune turned out to be momentary as it again slid in the consequent year. Hence, it can be said that except a growth in 2021, the bottomline of SCL rode a downward trajectory in all the years under review.
In 2019, the sales of SCL grew by a marginal 6 percent year-on-year. Locally, both oral care and baby care segments recorded an increase in revenue, however, the export sales massively dropped during the year especially in the oral care segment. Afghanistan is the main export destination of SCL which witnessed a year-on-year drop of 80 percent in sales revenue. Moreover, there were no sales to Europe during the year. The cost of sales grew by 14 percent year-on-year in 2019 on the back of Pak Rupee devaluation which rendered the imported raw materials expensive. Consequently, the GP margin of SCL dropped from 36 percent in 2018 to 31 percent in 2019. Gross Profit also slid by 9 percent year-on-year in 2019. The operating expenses also slid during the year as the company spent less on advertising and promotion activities and focused more on trade promotion through discounts. Other income also behaved favorably as the company made scrap sales during the year. Conversely, other expense didn’t offer any support as it grew by 50 percent year-on-year mainly on the back of loss on foreign exchange. Operating profit managed to post a marginal 9 percent year-on-year growth. OP margin also remained almost intact at 7 percent despite a considerable drop in GP margin. What gave a major blow to the bottomline was a whopping 122 percent year-on-year rise in finance cost on the back of high discount rate and increased borrowings during the year. In 2019, the debt-to-equity ratio of SCL rose from 22 percent to 33.5 percent. The bottomline posted a major slump of 64 percent in 2019 to clock in at Rs.24.33 million. NP margin dropped to 1.4 percent in 2019 from 4 percent in 2018. EPS also dropped to Rs. 6.24 in 2019 from Rs.17.24 in the previous year.
In 2020, the world economy was marred by the global pandemic which also took its toll on the topline of SCL. The topline dropped by 4 percent year-on- year in 2020 as the export sales of the company continued to shrink. During the year, the company only made export sales to Mozambique. Locally, the baby care segment posted an 18 percent year-on-year uptick, however, oral care and hygiene segment remained tamed. Gross profit also slid by 25 percent year-on-year as high cost of raw and packaging material as well as fuel and energy coupled with Pak Rupee devaluation pushed the cost up by 6 percent year-on-year in 2020. GP margin also nosedived to 24 percent in 2020. Operating expenses were quite in check as the company massively cut down its expenditure of advertisement and promotional activities. Other expenses also dropped by 98 percent year-on-year in 2020 as the provisions against WWF, WPFF, doubtful advances, slow moving stores and spares which were booked last year wasn’t there in 2020. Moreover, loss on foreign exchange and disposal of fixed assets also dipped during 2020. Other income grew on the back of reversal of aforementioned provisions coupled with scrap sales made during the year. Despite all the positive developments on the operational front, the operating profit dropped by 36 percent year-on-year in 2020 while OP margin moved down to 4.8 percent in 2020. Finance cost also grew by a massive 143 percent in 2020 on the back of high discount rate in the initial quarters of FY20 coupled with increased short-term and long-term borrowings during the year. The debt-to-equity ratio soared to 70.64 percent in 2020. A major hit coming on the back of increased financial charges dragged the bottomline into red zone with a net loss of Rs.18.45 million in 2020. The loss per share stood at Rs. 4.73 in 2020.
2021 was the most privileged year for SCL as not only did its topline grew by 26 percent year-on-year, the bottomline also recovered from net loss to boast the highest ever net profit. While local sales showed a stunning growth in 2021, export sales also witnessed some signs of recovery especially in Mozambique. The company also added Ireland to its export destination during the year. High sales volume, better sales mix and revised pricing enabled the company to absorb the fixed overhead and post a year-on-year growth of 60 percent in the gross profit. GP margin also improved to 31 percent in 2021. Operating expenses grew in line with inflation, however, other expense multiplied by over 52 times on the back of provisions booked for WWF and WPFF coupled with loss on disposal of fixed assets and impairment of fixed assets. This whopping rise in other expense was partially offset by a favorable movement in other income on the back of scrap sales, grant income and exchange gain. The operating profit posted a staggering year-on-year growth of 244 percent in 2021 with OP margin standing at a stunning 13 percent. Finance cost was also under control due to low discount rate coupled with lesser borrowings during the year. Debt-to-equity ratio dropped to 52 percent in 2021. SCL posted a net profit of Rs. 155.11 million in 2021 with the highest ever NP margin of 7.2 percent. EPS for the year was Rs. 39.77.
As the company heaved a sigh of relief as the signs of COVID-19 began to fade, 2022 brought another list of challenges. Political instability, record high inflation and discount rate and sharp depreciation of Pak Rupee, once again wreaked havoc on the profitability and margins of SCL. While the topline grew by 24 percent year-on-year on the back of volumetric as well as growth as well as upward revision in price, high cost of sales on the back of rising commodity prices and exchange rate fluctuation put a pressure on the GP margin which slid to 24 percent in 2022. Gross profit also shrank by 4 percent in 2022. Operating expenses also grew owing to inflationary pressure coupled with increased spending on advertising and promotion. Freight charges also expanded owing to increase in offtake both in local and export markets. The company, once again started making sales to Afghanistan which were discontinued for quite some time. Other income provided support to the bottomline as it grew by 136 percent on the back of rental income, scrap sales and grant income. Other expense also gave a breather. Yet, SCL couldn’t sustain its operating profit which dropped by 60 percent year-on-year with OP margin squeezing to 4.2 percent in 2022. Finance cost grew by 62 percent on the back of increased borrowings and high discount rate. Debt-to-equity ratio clocked in at 119.82 percent in 2022. The bottomline also plunged by 89 percent year on-year in 2022 to clock in at Rs.17.76 million with an NP margin of 0.7 percent. EPS massively dipped to Rs.4.55 in 2022.
Recent Performance (1HFY23)
The topline of SCL continued its upward journey in 1HFY23. Not only did the local sales grew enormously, the company discovered new export market which provided a tremendous boost to its export sales. High cost of sales dampened the GP margin of the company which slid to 23 percent in 1HFY23 from 25 percent during the same period last year. Inflationary pressure also drove up the operating expenses, however, other income and other expense behaved favorably during the year. The operating profit grew by 138 percent in 1HFY23 with OP margin clocking in at 7.3 percent versus 5.4 percent in 1HFY22. Finance cost grew by a massive 155 percent in 1HFY23 as the company utilized more short- term and long-term finances coupled with unmet discount rate level during the period. While the bottomline grew by 78 percent year-on-year to clock in at Rs.35.75 million in 1HFY23, the NP margin stayed at the same level of 1.7 percent as recorded in 1HFY22. EPS grew to Rs. 9.17 in 1HFY23 from Rs.5.16 in 1HFY22.
Future Outlook
As the company is making strides in the export markets by tapping new geographical locations coupled with a sizeable market share in the local market, the topline is expected to attain new heights in the coming times. However, high cost of production, operating expense and financial charges will weaken the margins of the company. The company is required to play with its sales mix and pricing strategy as well as raw material sourcing to strengthen in margins.
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